As commodity prices limp off their all-time lows, it is an appropriate time to review who is left standing in African mining.
For the industry as a whole, 2015 was one of the worst years ever as commodity prices and, in their wake, share prices plummeted, although matters seem a little more stable in 2016. The total loss in the value of listed mining companies by 2016 has been estimated by Bloomberg to be US$1.4 trillion compared to 2011 share prices. Of course at this point, no-one really knows where commodities are going and, more importantly, when they’ll get there.
In April, the Standard & Poor’s widely-tracked GSCI (formerly the Goldman Sachs Commodity Index) rose an encouraging 10.1%. Gold was up 5% for the month and oil 22%. But as Standard and Poor’s commented, the mini-rally was driven by the weaker US dollar – not supply and demand fundamentals.
Indeed, Chinese demand remains weak with Goldman Sachs predicting that ‘iron ore will go back below US$35 (per ton)’. In early May, iron ore was trading at well above US$60/ton after hitting a record low (US$37/ton) in December 2015. So it is highly unlikely that this is the start of a big rally.
Barclays analyst Kevin Norrish suggests that ‘this seems like one of those mini rallies we’ve had in the last few years’. The ‘new normal’, with its depressed prices, looks like it will be prevailing for the foreseeable future.
Outside of South Africa, which appears to be in the processes of exacerbating its self-inflicted wounds, the big changes so far have involved the restructuring of the major international companies. There is every sign that the big names – BHP Billiton, Anglo American, Glencore, Rio Tinto and Vale – will succeed in restructuring and survive, an achievement that seemed by no means inevitable as the disasters of 2015 unfolded.
Anglo American lost some 70% of value on the London Stock Exchange last year, culminating in the company’s announcement in February that it would be selling 39 of its 55 mines. Anglo’s share price has more than doubled since then, although it is still worth about just one-quarter of its 2008 peak.
The ‘new normal’, with its depressed prices, looks like it will be prevailing for the foreseeable future
Other mining giants have a similar record. Glencore was the second-worst performer on the FTSE Top 100 last year (after Anglo American) but has subsequently been the second-best performer (again, after Anglo). More generally, towards the end of April, all European mining shares were up 25% for the year. The crash of 2015 is looking increasingly like an overreaction.
Nevertheless, the mining majors are cash-strapped at present. Even Rio Tinto, which handled the downturn best (retaining more than half its 2011 market value), has announced huge cuts to planned capital spending. It is slashing capex to US$4 billion in 2016 and US$5 billion in 2017 – an overall reduction of US$3 billion compared with previous planned capex. All the majors have cut at least as much. Earlier this year, BHP Billiton (the world’s biggest miner) announced capex cuts of US$3.5 billion.
None of this is good news for minerals development in Africa. Planned projects will no doubt proceed slower than planned. More speculative and exploratory development will be shelved. But the shock may be cushioned by Asian mining capital – both Chinese and Indian – buying into the industry, in some cases, in partnership with indigenous interests.
Some of the big projects in Africa seem to bear out this assessment. Rio Tinto’s gigantic US$20 billion ore venture at Simandou in Guinea is going ahead, with the company submitting its infrastructure bankability feasibility study to the government of Guinea on the last day of 2015. It is significant that, since 2012, 44.65% of the Simandou project has been owned by the Aluminium Corporation of China (Chalco), which brought additional financing of some US$1.35 billion to the table.
However, this study is only the second of the eight steps Rio Tinto anticipates completing before Simandou comes into production. The end-of-2018 completion date suggested by the government of Guinea now appears impossible. There is, however, plenty of useful information in the study. It confirms that the iron ore will be exported through a new-build harbour to be constructed in Guinea’s Forécariah prefecture (and not Port of Buchanan in neighbouring Liberia).
In terms of continent-wide trends, the most important thing about the Simandou study may be the names of the two companies lined up to build the new harbour and 670 km railway line: China Railway Construction Corporation and China Harbour Engineering Company. Together with Chalco’s mining interest, this might now be regarded as a Chinese project with some involvement by a traditional Western mining major.
The rise of Chinese involvement in African mining can be seen all over the continent. Some has been going on for years as the extensive Chinese presence in Zambia’s copper mining industry demonstrates. The interest in the coal and iron ore deposits in southern Tanzania, inland for Mtwara is almost exclusively Chinese. Another Asian interest, India, is also stirring. Indian company International Coal Ventures Private Ltd snapped up Rio Tinto’s Benga coal mine in Mozambique in 2014 (once valued at US$3.7 billion) for a mere US$50 million.
However, Chinese and Indian miners cannot summon up demand for minerals from nowhere, and the present slump is testing their commitment to African resources.
Chinese miners had the image of somehow being immune to the laws of supply and demand. Of course they are not. It has to be said, however, that the stability of the enabling environment is crucial. Zambia, for example, has amended its taxation and mining royalty rates several times in recent years.
In fact, Zambia’s poor enabling environment may be the biggest problem affecting that country’s copper mining. The neighbouring DRC, which shares the Central African Copperbelt, has done better. Mining of the largest undeveloped high-grade copper asset in the word – Kamoa in DRC’s Katanga province – seems to be going ahead.
The Chinese have appeared there, too. Last year Canadian miner Ivanhoe, the concession holder, sold just under 50% of the project to a previously little-known Chinese firm Zijin Mining Group, for US$412 million – a sum that made a big contribution to the US$1.2 billion development costs of the project. Ivanhoe stated late 2015 that it still believes the mine is on track to begin producing towards the end of 2018.
The shock may be cushioned by Asian mining capital buying into the industry, in some cases, in partnership with indigenous interests
A pattern has emerged in Africa as the resources slump has unfolded. The traditional majors are investing far less and divesting many interests. A part of the gap may be filled by Asian interests although not too much should be expected until (or should that be unless) commodity prices recover substantially. This leaves local interests. Again, at low prices, not too much should be expected. But some cash-flush players are on the acquisition trail.
The most significant of these is South Africa’s Sibanye Gold, which acquired three underground platinum mines from Anglo American in 2015 and one from Aquarius Platinum in early 2016. The company, which intends changing its name to Sibanye Resources, started with four ageing and marginal South African gold assets in 2013.
It proved better at keeping costs down than its original parent company, Gold Fields, and has enjoyed phenomenal growth since then. Sibanye has been sniffing around coal assets in South Africa. It has registered as an interested party with Anglo American – which is, of course, offloading its thermal coal interests in South Africa.
Sibanye, however, broke off negotiations with another coal miner, Waterberg Coal, in February this year. At about the same time, Sibanye CEO Neal Froneman, said the company was interested in acquiring ‘distressed’ assets elsewhere in Africa.
While not specifically excluding an interest in Anglo American’s Kumba iron ore mines in South Africa’s Northern Cape, Froneman was dismissive of the sector generally. Kumba is another part of the Anglo stable on the block, but is hamstrung by tax claims of more than ZAR5.5 billion. The iron ore market, Froneman argues, probably still brings with it too much of a downside in the foreseeable future.
South Africa offers a high-risk regulatory environment at present, with new legislation still in process and design of the local black ownership charter proving a fraught process. But this has not proven to be an insoluble hurdle to a company as nimble as Sibanye.
For the most part, mining is defined by appetite for risk. During the post-Millennium boom years to 2011, all too many of the large international firms seemed to lose that attribute. Much of big mining became routine, ‘a numbers game’ not that different to banking.
In 2016, risk is right back at the centre of the table. Those that thrive in Africa will be the miners that can rediscover this traditional virtue.